“The Costs and Benefits of Legalizing Marijuana” By Morgan Kimbarow

Introduction

In the 1960’s marijuana use was a shocking new facet of the counterculture movement.

People that were unfamiliar with the drug’s effect had the belief that it was dangerous and

perverted. It was highly stigmatized at the time but currently it is entrenched in mainstream

culture. Many countries including America have started to legalize marijuana. Many argue that

legalization would result in social and monetary benefits.

Proponents believe that the legalization of marijuana would decrease the government’s

budget by eliminating marijuana law enforcement. There is a huge expenditure of money spent

on enforcing marijuana laws every year. This is money that could be better utilized to enforce

and prevent violent and heinous crimes. This decrease in spending could potentially save the

states millions and the country billions. If funds are properly allocated and are wisely budgeted,

decriminalization may reduce debt and increase expenditure on local and federal projects that

will improve social welfare.

On the local level there are states whose economies suffer because of the prohibition on

marijuana. Alaska is a state that is in the lower tier of the United States in terms of their

economy. They are also one of the biggest consumer of cannabis products in the U.S. Lower

economic states can generate revenue by effectively taxing marijuana which will cause a raise in

GDP. Similar to the federal level, state governments like Alaska can increase government

revenue by taxing consumption.

There are many monetary benefits from legalizing marijuana but there are also many

social benefits as well. Although most cost benefit analysis(CBA) try to find benefits for all

parties involved, legalization could potentially cripple drug trade organizations. Countries like

Mexico are infested with cartels, these cartels illegally export marijuana into the United States.

These cartels murder, kidnap, and extort in order to net their profits. Consuming marijuana that

is produced by cartels is supporting their infrastructure and enabling them to continue their

trafficking. If U.S. states that bordered Mexico legalized marijuana it would cut out cartels and

drug trade organizations as middle men.This would cripple cartels, reduce profits, and potentially

save many lives.If marijuana was legalized and easily accessible it would eliminate the danger

inherent in obtaining the drug illegally. Consumers would feel safer when purchasing cannabis

products knowing they would not have to put their lives at risk.

California’s current debt is over $426 billion, this number is staggering to California’s

economy. There are two ways to potentially erase this debt; by decreasing spending and through

increasing taxes. The legalization of marijuana allows the opportunity for a brand new market to

commence. As new businesses open this will create new jobs and decrease the current

unemployment rate. There are many obvious and concealed benefits to ending marijuana

prohibition.

Literature Review

One of the first CBA’s I came across through my research was “The Economic

Implications of Marijuana Legalization in Alaska” by Scott W. Bates who is a principal

investigator of economic analysis and research. Bates does an excellent job of organizing his

research into easily comprehensible material. His first section looks at justice system costs and

how much the government spends enforcing drug laws. “Total arrests for marijuana offenses

averaged 1,233 annually, with most of them (1086) for possession and the remainder (147) for

sale or manufacturing.” (Bates) This also accounts for 6% of juvenile arrests. “Less than half of

all drug-related arrests nationally (45%) are for marijuana, as compared with 66% in Alaska.

Whereas 27.5% of arrests for sale or manufacture of a drug nationally are for marijuana, Alaska

has a much higher rate at 38.5%. About half of all drug possession arrests nationally are for

marijuana, whereas 73.4% of the drug possession arrests in Alaska are for marijuana.” (Bates)

Bates estimates that the total judicial system expenditure allocated marijuana prohibition totals

over $16 million.

Bate’s CBA of marijuana legalization in Alaska is neutral and presents his information

objectively. Bates sets out to clearly define prohibition and show how it can be effective when

used properly. Prohibition must drastically reduce consumption of the specific drug.,secondary

effects must be positive; e.g. that as a result of prohibition crime decreases, it must effectively

decrease substance abuse, lastly the monetized benefits that prohibition incurs.

Bates dwells more deeply into this definition to define the problems of prohibition, he

comes up with the following reasons why prohibition in Alaska failed. “1) Marijuana prohibition

creates a black market in marijuana rather than eliminating it. 2) Prohibition increases violent

crime by preventing black market participants from resolving their differences through standard

nonviolent mechanisms. 3) By raising the price of marijuana, prohibition encourages income-

generating crime such as theft, since additional income is needed to purchase marijuana. 4) In

black markets, participants must either evade law enforcement authorities or pay them to look

the other way, so the scope for corruption is substantial. 5) Making products illegal may make

them less safe. The United States experience with alcohol prohibition provides a classic example

of this effect: deaths from adulterated alcohol soared 6) Revenue is diverted from government

and law-abiding citizens to criminals. 7) Prohibition breeds disrespect for the law. 8) It

complicates or compromises other policy areas, for example, civil liberties and rights to privacy,

and international relations.”

Jeff Miron an economics professor at Harvard University, has had a lot to say about

marijuana legalization. He looks at decriminalization on a macro level to determine benefits and

costs. He understands that it is a hotly debated topic and does not expect change to happen over

night. Miron quantifies benefits for all 50 states and then quantifies it federally. Miron examines

tax revenue from legalization that would lead to increased spending to other numerous welfare

projects. He explains that legalization can not be quantified only through monetary profits and

that the problem must also be viewed socially as well. Social benefits must be properly analyzed

in an effective CBA. It is important to recognize benefits at the state level and understand how

they ultimately attribute to the federal level.

The “Economics of Cannabis Legalization” written by Dale Gieringer PhD attempts to

accurately tax marijuana consumption per ounce, gram, and joint (marijuana cigarette). This is

valuable information because it shows how drastic potential benefits were in 1994 and that they

still hold true today. This information is crucial because it helps consumers realize sales tax per

consumption amount. He calls this “harmfulness tax” and proposes that marijuana would be

taxed comparatively to tobacco and alcohol products. Gieringer makes mention of a potential

marijuana market that would create new jobs and businesses. Another way that Dr. Gieringer

shows benefit from legalization is by accounting for the profit from cultivating marijuana.

Although this is an older study the information is still vital because it provides a basis to

calculate benefits today.

There are many obvious benefits the United States can obtain by legalizing marijuana.

However an aspect that is constantly overlooked is how legalization may result in a decrease in

profits from dangerous cartels.There has been numerous problems over the years with cartels

from Mexico illegally exporting drugs into the United States. Marijuana accounts for a large

percentage of their illegal exports. “Reducing Drug Trafficking Revenues and Violence in

Mexico;Would Legalizing Marijuana in California Help?” examines the ramifications cartels

potentially incur if states that border Mexico legalize marijuana. This research does a good job

of applying social benefits to decriminalization. A usual goal for a CBA is to apply Pareto

Efficient principles, in this situation however a benefit is being taken away as a result of

legalization

Description of Data

This table is based on Jeff Miron’s research and it deals with the expenditure of marijuana

prohibition enforcement. The data is based on yearly projections. These numbers are composed

for each state, and are then calculated to derive a federal total. The first column is each state’s

police budget, these are the costs of enforcing marijuana. The second column is each states

judicial budget, this can be understood as court costs and lawyers fees. Third is the corrections

budget, this is the cost of housing prisoners who have committed marijuana crimes.

This table shows the potential state revenue from tax. The first column shows the use

rate this can be simplified to mean how much marijuana is smoked per population of each state.

The next column shows the total population of each state that consumes marijuana. The third

column shows the proportion of the total population of each state to the amount of marijuana

consumed. The fourth column shows the potential revenue for each state. It is important to note

that California has the highest number of users therefore they would have the highest tax

revenue. Legalizing marijuana in California alone would yield a higher profit then many smaller

states combined.

This table shows the revenue for cartels and drug trade organizations in 2005. The

biggest source of revenue from illegally smuggling into the U.S. is marijuana. It also constitutes

the largest share of revenue. Therefore if marijuana is made legal in states that border Mexico it

will help eliminate profits from the illegal drug trade. Legal states will now be able to legally

produce marijuana and there will be no demand to buy marijuana from cartels.

This table shows that there is a high amount of marijuana arrests in Alaska compared to the rest of the

United States. There is a big expenditure on enforcement of marijuana laws. There fore legalization will

reduce enforcement costs in Alaska. Alaska is one of the states that will greatly benefit from marijuana being

legalized because there will be a decrease in arrests due to marijuana and will result in government savings.

Since there is a high proportion of use in Alaska the total judicial budget is fairly high. In

terms of policing cost we can monetize this around the ballpark of $1.5 million. Legal and

Judicial fees will run around $9.45 million. The corrections (housing prisoners arrested from

marijuana laws) budget will be approximately $5.05 million. If legalized we can assume that

these costs will be mitigated to zero. As a result the $16 million saved could be used to fund

various social welfare projects.

It is difficult to determine all the costs from marijuana legalization since it hard to

monetize the effects of legalization. Gieringer places an external dollar amount per one joint

consumed. This external costs pertains to lost costs as well as illnesses from consumption.

According to the table there is potentially a high harmfulness cost from consuming marijuana.

This chart shows the economic benefits of cannabis legalization according to Gieringer.

What is interesting about this data is that it accounts for enforcement savings as part of its

benefit. Another fascinating component that table accounts for is the hemp industry. The hemp

industry accounts for tourism and new business that attribute to an improved economy through

out the United States.

Colorado’s marijuana use has increased since legalization. More people are consuming

marijuana in Colorado then any other state. This shows that there has been an increase in use as

well as increase in tourism due to the hemp industry. This chart can be used to estimate

increased marijuana use in states that legalize marijuana.Legal marijuana sales began in

Colorado 18 months ago. Since then, tourism is up 14 percent. (Vasilinda 2014)

(Rusche & Sabat)

NPV Calculations

NPV= -C0 + C + C2 + ….. (1+R) (1+R) C0=Initial Cash Investment C= Cash inflow R= Discount rate

Above is the formula I used for my NPV Calculations. It was difficult to find costs

associated with legalization because there were usually only benefits associated with legalization

however I was able to monetize some. The discount rate I held constant for all my calculations

was 0.250 ,the current American interest rate is 0.250 % (FED). My NPV calculations are all

based on a one year projection. Overall I found this formula to be simple yet effective in

determining proper effective values for my data.

The information I used derived from Miron’s data. The state and local benefit from

legalization is $5.3 billion. The benefit at the federal level is $2.4 billion. If marijuana is taxed

at the rate of all other goods there is an additional benefit of $2.4 billion. If marijuana is taxed

comparable to alcohol and tobacco there is an additional benefit of $6.2 billion. If marijuana is

taxed like all other goods the total NPV calculation for one year is $8.08 billion. If marijuana is

taxed like tobacco and alcohol the total NPV calculation for one year is $11.12 billion.

The next NPV calculation I ran was based on Bate’s data from his CBA of legalization in

Alaska. I calculated two NPV’s one for prohibition and the other for legalization. If legalized

the cost of expenditure is immediately erased from $24 million so I counted this as a benefit.

There was an additional cash flow of $12 million accounted by potential revenue from tax.

There was also another cash flow of $35 million, this was potential revenue from a 2%increase

in tourism. Overall the one year NPV calculation was $56.8 million as a result of legalization.

The NPV for prohibition started off with prohibition costs that included law expenditure, the

total cost was $24 million. There was also an additional cost of $8 million, this accounted for the

impact on family, lost economic output, and secondary justice system effects. Overall the one

year NPV calculation of prohibition is -$25.8 million annually.

I again ran two NPV calculations while examining the profit cartels make from drug

trafficking. The cash flow for cartels is $8.57 billion from marijuana, $3.96 billion from cocaine,

$1.02 billion from meth, and $0.34 billion from heroin. In the prohibition model all of the cash

flows were added up and discounted for a total net present value of $11.12 billion. In the

legalization calculation I added all of monetized inflows minus the benefit from marijuana, this

total profit for the cartels would end up being $4.26 billion.

The last NPV calculation I ran was the total benefit of the United States legalizing

marijuana. I used my data from Gieringer’s research However this NPV calculation accounts

for the added benefit of the hemp industry to include tourism and other profitable business

attributing to the federal profit comparable to increased tourism rates in Colorado. I was able to

come up with a cost of legalization by monetizing the harmfulness cost per “joint” (marijuana

cigarette) consumed. The total profit is as follows $6.4 billion in excise tax, $1.3 billion in sales

tax, $9 billion in enforcement savings, and $10 billion in hemp industry/tourism. Assuming the

mean consumption of all daily users is two or three joints per day, current national consumption

can be figured to exceed 7 to 10 million joints per day, or 1200 to 1800 metric tons of 6% THC

cannabis per year. (Grienger) Compared to Colorado’s chart there was a 72% increase in

marijuana use so if 7 million joints were assumed during prohibition legalization would increase

use to 12.04 million joints per per day. Using Griengier’s model of $0.40 external cost per joint

this equals an annual external cost of $1.76 billion. The one year NPV calculation for the United

States would be $21.21 billion.

Conclusion

Legalizing marijuana has been a hotly debated topic for some time. There are obvious

benefits of legalization that can be monetized. On all levels marijuana is beneficial and can

drastically increase state and federal income. That is why marijuana must be legalized. The U.S.

continues to put themselves at a disadvantage because they are preventing the country from an

enormous amount of tax revenue. By continuing prohibition the country denies itself taxable

revenue.

Marijuana when used properly has many medical benefits. When it is abused though it

can cause unsatisfactory performance in daily life tasks. That is why it should be taxed

comparable to alcohol and tobacco, items that have obvious detrimental qualities. If legalized

and taxed properly the tax revenue could be tens of billions of dollars. Not only is this money

saved and decreasing debt but it can be used improve the economy by creating new projects..

This is money that can be spent enforcing laws and preventing dangerous crimes.

In certain states like Alaska it is difficult to improve the state’s economy. Alaska has an

increased amount of marijuana use and crimes compared to other states. If this consumption is

taxed and the expenditure on marijuana laws is eliminated it will improve the state’s economy.

Alaska can also benefit from added profits from tourism if the rate of visitors is increased to a

rate comparable to Colorado’s. If marijuana is legalized in Alaska it will increase GDP and

improve the economy

Marijuana legislation also affects countries like Mexico that borders the United

States.Marijuana legalization affects violent drug organizations that make their money trafficking

illegal drugs. Their main revenue source is marijuana which accounts for 61.7% of their

revenue. If marijuana is immediately legalized the profit margin for the cartels is immediately

cut in half. Legalization will cripple the ruthless and murderous cartels.

Marijuana can be beneficial in many capacities. I believe that it is only a matter of time

before it is finally legalized. Marijuana is less stigmatized then it ever was before so this will

cause people to reevaluate its legality. Legalization can amount in huge profits on the state and

federal level. I propose that the United States immediately begin active legislation to legalize

marijuana throughout the country.

References

Bates, Scott. The Economic Implications of Legalization in Alaska. Boreal Economic Analysis and Research, 2004. Web.

Crites-Leoni, Abbi Medicinal Use of Marijuana: Is the Debate a Smoke Screen for Movement Toward Legalization? 19 J. Legal Med. 273, 280 (1998) (citing Schwartz, et al., Short- Term Memory Impairment in Cannabis-Dependent Adolescents, 143 Am. J. Dis. Child. 1214 (1989).

Gieringer, Daniel. Economics of Cannabis Legalization. NORML, 1994. Web.

"FED Federal Funds Rate, American Central Bank's Interest Rate." Federal Funds Rate FED. N.p., n.d. Web. 09 Dec. 2015.

Kilmer, Beau, Johnathon Caulkins, Brittany Bond, and Peter Reuter. Reducing Drug Trafficking Revenues and Violence in Mexico. Rand Corporation, 2010. Web.

Miron, Jeff. The Budgetary Implications of Marijuana Prohibition. Harvard University, June 2005. Web.

Rocky Mountain High Intensity Drug Trafficking Area. “The Legalization of Marijauna in Colorado: The Impact.” Volume 2, August 2014.

Rusche, Sue, and Kevin Sabet. "What Will Marijuana Cost Employers?" 2014: n. pag. Print.

Vasilinda, Mike. "Tourism, Tax Revenue up in Marijuana-friendly States." News4Jax [Denver] 4 Aug. 2015: n. pag. Print.